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Pimco and Bill Gross: What is it and who is he? Pimco and Bill Gross: What is it and who is he?
(35 minutes later)
Last week, investors around the world were stunned when Bill Gross, the co-founder of Pimco - the world's largest bond fund - announced his departure from the firm. But what is Pimco, and how did it and Mr Gross come into prominence?Last week, investors around the world were stunned when Bill Gross, the co-founder of Pimco - the world's largest bond fund - announced his departure from the firm. But what is Pimco, and how did it and Mr Gross come into prominence?
What is Pimco?What is Pimco?
Pimco is the world's largest bond fund - "a behemoth in the world of fixed income investments," according to David Keeble, global head of fixed income at Credit Agricole. ("Fixed income" is the business world term for investing in bonds, like US government debt, as opposed to "equities", like shares in Apple.)Pimco is the world's largest bond fund - "a behemoth in the world of fixed income investments," according to David Keeble, global head of fixed income at Credit Agricole. ("Fixed income" is the business world term for investing in bonds, like US government debt, as opposed to "equities", like shares in Apple.)
A bond fund essentially is a group of bonds - such as US Treasury bonds or mortgage bonds - that are chosen by a money manager as a safe place for investors to put their money for a certain period of time. A bond fund is essentially a group of bonds - such as US Treasury bonds or mortgage bonds - that are chosen by a money manager as a safe place for investors to put their money for a certain period of time.
It was co-founded by Bill Gross, now 70, in 1971, with $12m in assets, as an offshoot of Pacific Life Insurance Company. In 2000, it was acquired by a German company, Allianz SE, but it operates largely independently. Pimco was co-founded by Bill Gross, now 70, in 1971, with $12m in assets, as an offshoot of Pacific Life Insurance Company. In 2000, it was acquired by a German company, Allianz SE, but it operates largely independently.
As of today, through various funds made up of different types of bonds, Pimco manages nearly $2 trillion (£1.2tn) in client money.As of today, through various funds made up of different types of bonds, Pimco manages nearly $2 trillion (£1.2tn) in client money.
Most of those clients are large institutional investors, like pension funds, central banks, and educational institutions, who are attracted to Pimco because investments in bonds are generally seen as safer.Most of those clients are large institutional investors, like pension funds, central banks, and educational institutions, who are attracted to Pimco because investments in bonds are generally seen as safer.
How did Pimco get so big?How did Pimco get so big?
It all comes down to Mr Gross, who was the firm's chief investment officer. In 1987, he started and, until last week, managed, Pimco's Total Return Bond Fund, the largest bond mutual fund in the world.It all comes down to Mr Gross, who was the firm's chief investment officer. In 1987, he started and, until last week, managed, Pimco's Total Return Bond Fund, the largest bond mutual fund in the world.
That fund has earned an average of 7.9% annually since that time. According to the Wall Street Journal, the overall bond market, as measured by the Barclays US Aggregate Bond Index, averaged 6.8% annually over the same period.That fund has earned an average of 7.9% annually since that time. According to the Wall Street Journal, the overall bond market, as measured by the Barclays US Aggregate Bond Index, averaged 6.8% annually over the same period.
During the financial crisis the fund did extraordinarily well - earning 7.9 points more than the overall bond market.During the financial crisis the fund did extraordinarily well - earning 7.9 points more than the overall bond market.
That convinced many investors to pour their large portfolios into the fund, which was seen as one of the safest investments around.That convinced many investors to pour their large portfolios into the fund, which was seen as one of the safest investments around.
Also, Mr Keeble points out that Pimco is different than most funds.Also, Mr Keeble points out that Pimco is different than most funds.
"A lot of people concentrated on both equities and bonds," he says."A lot of people concentrated on both equities and bonds," he says.
"Pimco was unique in that they were a fixed income asset manager - you've got other huge asset managers like Blackrock, but [Mr Gross] was very big in one particular market.""Pimco was unique in that they were a fixed income asset manager - you've got other huge asset managers like Blackrock, but [Mr Gross] was very big in one particular market."
And that particular market happened to be in a bull market - that is, rising - over the past two decades.And that particular market happened to be in a bull market - that is, rising - over the past two decades.
Why was Bill Gross such a good investor?Why was Bill Gross such a good investor?
Most analysts and investors say that Bill Gross was a "genius" - he focused on US Treasury bonds when no one else was really paying attention, and made good bets, particularly during the dot com bubble and the housing crisis.Most analysts and investors say that Bill Gross was a "genius" - he focused on US Treasury bonds when no one else was really paying attention, and made good bets, particularly during the dot com bubble and the housing crisis.
That's what earned him the moniker "the Bond King".That's what earned him the moniker "the Bond King".
However, some contrarians have argued that Mr Gross was simply lucky - a point he himself has partly made as recently as last year.However, some contrarians have argued that Mr Gross was simply lucky - a point he himself has partly made as recently as last year.
"Am I a great investor? No, not yet. To paraphrase Ernest Hemingway's "Jake" in The Sun Also Rises, "wouldn't it be pretty to think so?"' wrote Mr Gross in a letter to investors."Am I a great investor? No, not yet. To paraphrase Ernest Hemingway's "Jake" in The Sun Also Rises, "wouldn't it be pretty to think so?"' wrote Mr Gross in a letter to investors.
He added, in a premonition of what was to come: "It seems, perhaps, that the longer and longer you keep at it in this business the more and more time you have to expose your Achilles heel—wherever and whatever that might be."He added, in a premonition of what was to come: "It seems, perhaps, that the longer and longer you keep at it in this business the more and more time you have to expose your Achilles heel—wherever and whatever that might be."
So why did Pimco reportedly force Bill Gross to leave?So why did Pimco reportedly force Bill Gross to leave?
Mr Gross made some bad investments recently - including a big one against US Treasuries in 2011. That was based on his belief that as central banks around the world pumped cheap money into their respective economies, prices would rise, which did not happen.Mr Gross made some bad investments recently - including a big one against US Treasuries in 2011. That was based on his belief that as central banks around the world pumped cheap money into their respective economies, prices would rise, which did not happen.
That led to losses at his Total Return Fund, and investors pulled billions of dollars out of it as a result.That led to losses at his Total Return Fund, and investors pulled billions of dollars out of it as a result.
But that bet was coupled with another, more personal issue: Mr Gross reportedly did not get along with Mohamed El-Erian, Pimco's former chief executive officer, who left the firm in January. Many anonymous reports, published in Bloomberg and elsewhere, have indicated Mr Gross had an abrasive management style that displeased Allianz's board.But that bet was coupled with another, more personal issue: Mr Gross reportedly did not get along with Mohamed El-Erian, Pimco's former chief executive officer, who left the firm in January. Many anonymous reports, published in Bloomberg and elsewhere, have indicated Mr Gross had an abrasive management style that displeased Allianz's board.
Eventually, Mr Gross was reportedly presented with a choice: resign or be fired. He chose to move to Denver-based Janus Capital Management - but reportedly did not inform Pimco of his decision in advance.Eventually, Mr Gross was reportedly presented with a choice: resign or be fired. He chose to move to Denver-based Janus Capital Management - but reportedly did not inform Pimco of his decision in advance.
"While we are grateful for everything Bill contributed to building our firm and delivering value to Pimco's clients, over the course of this year it became increasingly clear that the firm's leadership and Bill have fundamental differences about how to take Pimco forward," Douglas Hodge, Pimco's newly appointed chief executive officer, said in a statement."While we are grateful for everything Bill contributed to building our firm and delivering value to Pimco's clients, over the course of this year it became increasingly clear that the firm's leadership and Bill have fundamental differences about how to take Pimco forward," Douglas Hodge, Pimco's newly appointed chief executive officer, said in a statement.
Will Pimco collapse?Will Pimco collapse?
The short answer is no.The short answer is no.
Although investors have reportedly withdrawn at least $10bn in the days since Mr Gross's departure, even the largest estimates only put the total amount of withdrawals at $100bn - a drop in the ocean for a firm the size of Pimco.Although investors have reportedly withdrawn at least $10bn in the days since Mr Gross's departure, even the largest estimates only put the total amount of withdrawals at $100bn - a drop in the ocean for a firm the size of Pimco.
However, most analysts expect that because Pimco is so large, there will inevitably be some volatility in the bond market as positions get reshuffled.However, most analysts expect that because Pimco is so large, there will inevitably be some volatility in the bond market as positions get reshuffled.
"Probably some asset classes of bonds like mortgage bonds may be in for a rocky ride but the wider impact of this is fairly limited," said Mr Keeble."Probably some asset classes of bonds like mortgage bonds may be in for a rocky ride but the wider impact of this is fairly limited," said Mr Keeble.